Indonesia braces itself for higher inflation

Signs of an uptrend were confirmed by the country's statistics agency on Wednesday (Feb 2), when it announced that the annualised inflation rate in January was 2.18 per cent, the highest since May 2020, with food, housing and household equipment being the main drivers. In 2021, inflation was 1.87 per cent.

"Rises in the price of commodities and various food due to wetter weather (that affected harvests) contributed to the higher inflation," Mr Febrio Kacaribu, head of the fiscal policy office at the finance ministry, said on Thursday when he commented on the January figure.

He also underlined that recovering consumer demand following the easing of Covid-19 restrictions had pushed prices up.

Mr Febrio said the government was trying to keep the situation under control by, among other things, making domestic energy prices, including petrol, affordable at home.

Crude oil prices have jumped, but the Indonesian government has partially absorbed the increase in prices to ensure petrol remains affordable at home. Critics said this ran counter to Mr Widodo's pledge early in his tenure that such prices would be left to the international market so as not to put pressure on state coffers.

Mr Widodo's administration, which took office in 2014, has thus far been credited for curbing inflation, primarily by intervening in the market and addressing inefficiencies in logistics in the sprawling archipelago.

Indonesia's average annual inflation was 4.6 per cent between 2009 and 2020, a sharp improvement from the 9.5 per cent between 2001 and 2008.

Mr Widodo's administration has issued no fewer than 12 regulations stipulating price caps on food, which is a sensitive issue. Many in the country of 270 million people spend more than half of their expendable income on food, and runaway prices, if not addressed properly, could lead to political instability.

The government under Mr Widodo has also worked to improve distribution in the country, building a total of 1,298km of toll roads in his first five-year term through to 2019, data from the public works ministry showed. In 2020, about 250km was built, and in 2021, about 300km. Between 1978 and 2014, only 795km was built.

On Friday, Mr Widodo inaugurated a new toll road in North Sumatra and, in a live broadcast, said that it would allow orange growers in a village nearby to slash their transportation costs by 75 per cent, making it easier for their products to compete with imports. 

Investment bank Mandiri Sekuritas economists Leo Putera Rinaldy and Imanuel Reinaldo, in a Feb 2 note to investors, said: "Inflation will start to elevate to above 2.5 per cent in April, mostly owing to the effective VAT (value-added tax) rate increase and higher seasonal price amid Hari Raya… and is projected to breach the 3 per cent level starting May or June."

Finance Minister Sri Mulyani has also commented on the risks of inflation for Indonesia.

"A wide range of prices were in check, but we have to closely monitor 2022," she said last month while noting that inflation in the country remained relatively tame, compared with other emerging markets, such as Brazil, where the rate has gone above 10 per cent.

She also pointed out that US inflation had reached a 30-year high at above 6 per cent, Russia at 8.4 per cent, Mexico at 7.4 per cent and South Africa at 5.5 per cent.

She stressed that the government's main task in 2022 was to support economic recovery and improve the position of the annual state budget, which has been saddled with additional debt following the government's move on social assistance programmes during the Covid-19 pandemic.

The Finance Ministry has announced that it will raise the VAT from 10 per cent to 11 per cent, with effect from April 1, and suspend a plan to lower corporate income tax from 22 per cent currently to 20 per cent.

Both moves are clearly aimed at raising revenue for the 2022 budget but would also add to inflationary pressure.

By Wahyudi Soeriaatmadja